Second Leg Down Below DJIA 12,000 – Facebook Selling Climax Opportunity
Investor’s first read – Brooksie’s edge before the open
Friday, June 1, 2012 9:15 a.m. ET
DJIA: 12,393.45
S&P 500: 1310.33
Nasdaq Comp.: 2827.34
Russell 2000: 761.82
TODAY: My expected second leg down is underway with a target of DJIA: 11,920 (S&P: 1255). Today’s action is very important. It should be a washout. If not, the BIG money may be making a stand. So often the market breaks out on the downside in what looks like the beginning of a huge plunge only to reverse back up. I see no reason for it to do so now, but this is a bit too predictable. (Don’t short here, not yet)
Yesterday’s economic numbers were disappointing, if not upsetting. Jobless Claims were up, the ADP Employment report weak and the Chicago PMI (regional business activity) report down more than projected, and the global picture gets gloomier by the day.
To make matters worse, stock-index futures plunged in pre-market trading when the Employment Situation for May was announced at 8:30 as a gain of 69,000 vs. a downwardly revised gain of 77,000 in April, the number was expected to top 150,000. Unemployment increased to 8.2% from 8.1%.
Again, I remind readers. Economic recoveries tend to mirror the preceding recession. I think too much has been expected of this one. We barely avoided a meltdown in 2008. Odds favor the recent slump in economic indicators will yield to a firming up later in the year.
One bright spot is crude oil, which at $84.13 has dropped to the lowest level since October. That doesn’t surprise me (“Plunge in Oil Prices Imminent ?” May 3 blog).The doomsters were warning of $4 – $5 gas just months ago. They will now focus on a looming depression ! Gotta love ‘em. They have been dead wrong for 3 ½ years.
EUROPE:
Much Europe has sunk (or will sink) into a recession – that’s been expected. How deep and far reaching is the big “Q.” Confidence has been sliding, unemployment averages 11% among the 17-euro area countries (24.3% in Spain). China’s growth rate has slowed dramatically in spite of
government efforts to stimulate the economy.
The euro may survive Greece’s exit, but maybe not Spain’s where borrowing costs are soaring.
The possibility of devastating financial and economic contagion with wide-spread damage is once again front and center.
The situation in Europe is “dire” to say the least and deteriorating daily.
A European depression, spreading to Asia and the United States ?
We have long passed the “ouch” point and headed for the “I can’t stand it any more point,” where people dump assets indiscriminately.
We are fast approaching the time for European leaders to pull the trigger and launch an impenetrable line of defense against a meltdown. After two years, I am assuming they have planned for this day holding back, waiting, for the right moment.
Getting 17 nations that differ so widely in terms of politics, financial and economic structures, cultures, and “history” on the same page is difficult as the EU has learned over the years. But faced with utter chaos and economic devastation, it can be done. It would be a defining moment for the euro concept.
When do they pull the trigger ?
Most likely when all hope is abandoned.
Head-fakes in the interim ?
Always ! Assuming Greece votes to stay with the euro in its elections June 17, expect a rally in global markets to follow the news. That will likely be followed by a renewal in a drop in stocks worldwide. (I’m getting ahead of myself here)
Facebook (FB): Yesterday I called for short covering in FB with resistance starting at 29.66, but maintained I believed it would find support between 24 and 26. It dropped to 26.83, then closed at 29.60 on rising volume. I am assuming most of the buying was short covering, though that activity may have attracted buyers. In pre-market trading FB has turned down from resistance at 29.60. WATCH any attempt it makes to bounce from this sell off. If it hits a wall, FB will drop to new lows to my projected area of 24-26. If the overall market plunges further, a drop below 20 is possible, but only momentarily where it would be attractive for a rebound to the mid-20s.
ECONOMIC REPORTS: One of the biggest worries facing investors is the direction of the U.S. economic recovery. This is a big week for
reports. The more important reports are noted here.
TUESDAY:
S&P Case Shiller Home Price Index (9:a.m.): Home prices declined 2.6^ vs. a year ago. This is down from February’s year over year decline of 3.5% supporting views that a turn around in housing is at hand.
Consumer Confidence (10 a.m.): Declined for the 3rd straight month bringing the Index for May down to 64.9 from 68.7 in April.
WEDNESDAY:
Pending Home Sales (10 a.m.); slumped 5.5% in April after a revised increase of 3.8% in March – big disappointment for those focused on a long-awaited rebound in housing.
THURSDAY:
ADP Employment Report (8:15 a.m.): New hires in May were 133,000 vs. April’s revised 113,000.
Q1 – GDP (8:30 a.m.) the second estimate for Q1, showed a gain of 1.9% vs. a revised gain for Q1 of 2.2%. Government spending dropped 3.9% contributing to the number.
Jobless Claims (8:30): for the week May 26 increased 10,000 to 383,000 bringing the 4-week average to 374,500.
Chicago PMI (9:45 a.m.): The Index dropped more than expected in May from to 52.7 from 56.2 in April.
FRIDAY:
Employment Situation: increased by 115,000 in April after gains of 154,000 in March and 259,000 in February.
ISM Manufacturing Index (10 a.m.): Rose 1.4% in April to 54.8. New orders were ahead to 58.2 from 54.5.
Construction Spending (10 a.m.) rebounded 0.1% in March after a drop of 1.4% in March.
George Brooks
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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